Brexit Deal Tipped To See Pound To Dollar Exchange Rate Climb To 1.37 Say Lloyds Research

As markets closed for the weekend, the British pound to dollar (GBP/USD) exchange rate fell back from recent highs, trending around $1.3155.

Forecast experts at Lloyds Bank suggest the pound sterling (GBP) could see a significant rise against the US dollar (USD) should a Brexit Deal is reached in the countdown to March 29th 2019.

"[GBP/USD] Prices continue to grind higher, but now approach the 1.3300-1.3320 region of resistance. Momentum would suggest we struggle to extend through this area in the near term. A Brexit deal announcement would trump this, opening a move towards 1.35-1.37 upper resistance (although the effect may be limited by its requirement to be passed by UK Parliament). Support today is a little higher at 1.3160-1.3130. A break there would suggest a move back towards the 1.30-1.2920 region recent lows."

The British Pound (GBP) exchange rates rose as US markets continued their heavy sell-off and the Dollar weakened, helping the GBP/USD x-rate move above 1.30.

Analysts at ING are positive on the outlook for the Pound as they look for the Bank of England to tighten rates in the first half of next year and are urging investors to position for a possible bounce as high as 1.38

Dow Jones sheds another 500 points as US Dollar Index tumbles

Things went from bad to really bad for investors in the US, as stock markets tumbled for yet another day on Thursday. The problems of Wednesday were plain to see for markets, and investors even contemplated whether Trump’s comments on the Federal Reserve might suggest that the Federal Reserve is in danger of losing its independence. The 500 points which were shed from the Dow totaled to more than 1300 over the last two days. This has had the interesting effect on weakening US dollar exchange rates and the Dollar Index (DXY) while emerging market FX (like the Turkish Lira (TRY), Mexican Peso (MXN)) was strong despite the fact that the weak risk sentiment would typically weigh heavily on the sector. The Euro to Dollar exchange rate (EUR/USD) was 0.6% higher, dragging the Pound to Dollar exchange rate up with it.

There is no UK data today, but overnight and into this morning there was a slew of encouraging Chinese data which helped buoy risk sentiment in Asia, lifting stocks and suggesting there may be tentative signs of a calming in the recent sell-off.

ING look for Bank of England to tighten interest rates in 2019

If you are more of a fundamental investor, then Brexit trading the Pound has probably been a rather excruciating ordeal for you. ING provided a nice report on the fundamental drivers behind the Pound and even commented on the outlook for interest rates, which is a nice change of pace. First, the fundamentals moving the Pound higher,

Their target for Cable is around where the Pound is trading at the moment, but the upside of their target still has a few pips to run, with blockbuster data next week a potential catalyst to help Sterling continue to enjoy its autumn run,

“We think the short GBP squeeze could continue through to 1.3220/60 - especially if UK data in the week ahead continues to support a BoE in tightening mode.”

Next week the most important economic data will be the CPI inflation release, where ING note that the risks could possibly be skewed to the downside as a weakening in the reading seems likely, however, should this not change their view that the Bank of England is set to tighten earlier than most in the market expects,

“Aug CPI data (Wed) is the main risk here - with the BoE noting that UK inflation dynamics could be softer than previously estimated given waning transitory factors. Yet, we still think that UK inflation consolidating around 2% into year-end (the Bank's target) will be sufficient for the BoE to tighten again in 1H19 if no deal Brexit risks are taken off the table.”

There is also retails sales data which is less important, but does still give an insight into the health of the UK economy and ING again here expect a softer print,

“We also have UK retail sales (Thu) in the week ahead - where expectations are for a softer print after the summer buoyancy in the UK consumer.”

Pound Exchange Rates to tire of positive headlines

ING is also calling time on the Pound rising on every single piece of good news emerging from Brussels and believe that markets will want to see something real an concrete if the bounce is to take on a more sold and meaningful leg higher,

“As for Brexit, we think GBP markets will start to get tired of the positive headlines following the initial re-pricing of no-deal risks and we suspect investors will now want to see some tangible progress on the Withdrawal Agreement to fully engage in a broad GBP recovery.”

The Irish border is clearly still a massive hurdle to overcome and yet, ING don’t believe it is safe to sleep on the possibility that there could be potential for a serious bounce higher in the coming months and Theresa May still likely to cling to her position which in turn provides some stability to proceedings,

“We agree with reports that any UK concessions on the Irish border are unlikely to come until after the governing Conservative Party Conference (ending 3 Oct) - but still recommend positioning for a sharp GBP/USD rebound to 1.36-1.38 over the next two months with PM May likely to be the one signing a Brexit deal in mid-November.”

Despite their belief that May is going to stay in power, the Dutch institution is cautious that Party Conference Season will bring some more volatility,

“The UK political backdrop remains fragile - and expect noise to pick-up as the Party Conference Season begins.”

The big unknown is how the market might react to Labour’s shifting stance towards a second referendum, and while ING are not sure what the GBP might do if Labour get very pro remain, but seem to think that in the short term at least it might be positive,

“The Labour Conference begins on Sun 23 Sep and we may see greater noise in the week ahead around a second Brexit referendum - or a big shift in Labour's Brexit stance. Difficult to say how GBP markets react here - though one could imagine the knee-jerk move may be positive (or fuel a further short squeeze).”

So a much better week for the Pound looks to be set to close today, but it is not yet clear whether the foundations of the recent rally are built on Sand or Rock. If most analysts are to be believed a close above 1.33 is the sign which could trigger a jump to 1.35 and give the Pound some breathing space. In my view having a strong opinion on something that is entirely predicated on headlines is a pretty dangerous game.

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